October 9, 2009
FAA Officially Rescinds Slot Auction Rule
The Federal Aviation Administration has officially rescinded its controversial plan to enact mandatory slot auctions on LaGuardia, JFK, and Newark airports. See 74 Fed. Reg. 52,132 (Oct. 9, 2009) and 74 Fed. Reg. 52,134 (Oct. 9, 2009).
Two recent law review articles discuss the congestion management problem at the New York-area airports, with specific reference to the FAA's failed (but arguably noble) attempt to enact meaningful regulations. The latest, Benjamin D. Williams's Comment, Playing the Slots: The FAA Gambles with Its Controversial Congestion Management Plan for New York's Busiest Airports, 74 J. Air L. & Com. 437 (2009), offers a detailed discussion of the law and policy implications of the FAA's proposed slot auction rule. Williams does a good job laying out the legal issues which were in play when the rule was first proposed and offers a strong defense for the FAA's regulatory authority in this area.
The second article--which has been discussed on the blog before--is by Professor Michael Levine. See Airport Congestion: When Theory Meets Reality, 26 Yale J. on Reg. 37 (2009). Levine's article presents an improved proposal for slot auctions--one which accounts for market realities and provides airlines holding slots to see the full opportunity costs of retaining (and possibly hoarding) their slots. From the abstract:
Some airports experience significant congestion at least some of the time, where "congestion" means that use of the airport by one aircraft delays or prevents use of the airport in that time slot by another. Another way to say this is that airport access can be "scarce." Virtually all economists agree that when a resource is scarce, it can be allocated most efficiently through the use of a mechanism that prices it to reflect its value to all other potential users. But efficient prices can only be assured in theory when both supply and demand are competitive, markets are complete (they allow purchases in any amount at any time), and the participants maximize utility by maximizing profit.
Analysts have used this theory to argue that airport congestion should be managed through the price mechanism, either by raising prices at peak times or by auctioning off permission to operate at peak times ("slots") to the highest bidder. Recently, the Federal Government has tried to put this theory into practice by instituting slot auctions at the major New York airports. But these airports are owned by a monopolist (as in most cities), the auction market proposal adopted by the FAA leaves markets incomplete by excluding many users and the airport monopolist, here as elsewhere, is a political entity whose goals often conflict with economic efficiency. In addition, the mechanism adopted by the FAA effects a large wealth transfer from airlines to the FAA, a result that may in principle not affect efficiency but which creates enormous resistance on the part of airlines to using the price mechanism and a substantial incentive to use the money for inefficient but politically expedient purposes.
This Essay takes account of these economic and political realities by proposing an auction market that reduces the influence of monopoly, is relatively complete, doesn't involve a wealth transfer, and still preserves choice at the margin that takes into account the value placed by other users on the slot. It establishes a blind auction in which slots are chosen at random and made available to all bidders (including the previous owner), with the proceeds going to the former owner and the amount of both the winning and second-highest bid (but not the identity of the second-highest bidder) made public. This forces the slot owner to explicitly consider the value it places on a slot and to compare it to an actual cash offer that has been revealed by the auction. The airport has no monetary incentive to create scarcity. Wealth transfers are voluntary.
October 8, 2009
U.S. Airline Access to the Japanese Market
While it has been widely reported in most major news outlets that only Northwest Airlines and United Airlines have direct traffic rights to Japan, it appears this information is incorrect. See Agreement Between the United States and Japan Relating to and Amending the Agreement of August 11, 1952, As Amended, T.I.A.S. 12945 (Apr. 20, 1998) (available here). While it is true that under the original 1952 treaty, only United and Northwest were designated to offer international service between the U.S. and Japan, according the 1998 executive agreement between the two parties:
(a) Each party may designated, pursuant to the 1952 Agreement, up to four (4) airlines, including any airlines, other than incumbent combination airlines, designated under the 1952 Agreement and all agreements and understandings related thereto . . . , to operate combination services as non-incumbent combination airlines[.]
(b) Effective January 1, 2000, each Party may designate a fifth non-incumbent combination airline.
Id. pt. I(B)(1)(a)-(b).
According to a footnote 5 of the agreement, the U.S. opted to designate Continental, Delta, and American Airlines.
Though this does make the oneworld Alliance's retention of Japanese Airlines less dire than has been discussed, it's important to note that the two other major alliances, Star and SkyTeam, each have two U.S. carriers with access to Japan. Additionally, the Star Alliance benefits from having Japan's other major international carrier, All Nippon Airways, as part of its alliance. Needless to say, despite American's access to the Japanese market, if JAL eventually defects to SkyTeam, it would leave oneworld at a competitive disadvantage in the transpacific market.
The Brookings Institution issued a new report analyzing national and metropolitan levels of commercial air travel patterns between 1990 and 2009. See Adie Tomer & Robert Puentes, Expect Delays: An Analysis of Air Travel Trends in the United States (2009) (available here).
The summary of the report's findings is interesting:
Air passenger travel in the United States experienced its first annualized drop in September 2008 since the tragedy of September 11, 2001, and the decline has continued through March 2009. Strong economic growth helped American airports increase their passenger and flight levels by over 60 percent from 1990 to 2008, tripling population growth. However, residents are traveling less since the current economic downturn, producing sustained reductions in passengers and flights since September 2008 and June 2008, respectively.
Nearly 99 percent of all U.S. air passengers arrive or depart from one of the 100 largest metropolitan areas, with the vast majority of travel concentrated in 26 metropolitan hubs. Between April 2008 and March 2009, 26 metropolitan areas captured nearly three-quarters of all domestic travelers, while 20 of these metros landed 94 percent of all international passengers. These extreme shares make these metropolitan hubs the critical links in the nation’s aviation system and reinforce their role as major centers of tourism and commerce.
Half of the country’s flights are routes of less than 500 miles, and the busiest corridors travel between the metropolitan hubs. Corridors of no more than 500 miles constituted half of all flights and carried 30 percent of all passengers in the most recent twelve month period starting April 2008. In fact, the metro Los Angeles/San Francisco corridor, stretching 347 miles, is the second busiest corridor in the country. Meanwhile, the most popular corridors operated between the 26 metropolitan hubs.
The 26 metropolitan hubs and other large metropolitan areas host a concentration of national delays—and the situation is worsening over time. The concentration within the 100 largest metropolitan areas was especially troubling with congestion-related delays as well as those lasting over two hours. Within the 26 domestic hubs, six experienced worse-than-average delays for both arrivals and departures: New York, Chicago, Philadelphia, Miami, Atlanta, and San Francisco.
The current economic recession caused carriers to reduce flight levels, which then improved ontime performance in the immediate term. However, the return of economic growth will resume the boost in travelers, a concomitant decline in on-time performance, and the hyperconcentration of U.S. air travel within major metropolitan areas and among flights traveling short distances. To ensure that the commercial aviation system runs efficiently while simultaneously improving its environmental record, policymakers must focus aviation and other modal investments on the metropolitan hubs and short-haul corridors, thus strengthening the performance of the our nation’s major economic centers.
October 7, 2009
A Conversation with Bob Crandall Now Online
The third installment of the International Aviation Law Institute's Conversations with Aviation Leaders oral history series is now online. For this round, the Institute hosted former American Airlines President and Charman Robert ("Bob") Crandall. Crandall led American Airlines through the turbulent period following deregulation to become one of the largest and most successful carriers in U.S. history. While initially opposed to airline deregulation, Crandall nevertheless found ways to help American thrive in the new competitive landscape by harnessing yield management to better price seats in relation to their value, developing the frequent flier program, and launching the computer reservation system Sabre. Though he retired from American in 1998, Crandall remains a strong voice in the airline industry. His speech calling for reregulation of the airline industry at the Wings Club in Washington, D.C. last year drew considerable attention and prompted Michael Levine, one the intellectual architects of deregulation, to answer Crandall's charges that deregulation amounts to a policy failure. (Both speeches were reprinted in Vol. 8, Issue 1 of IALI's biannual publication, Issues in Aviation Law and Policy.)
The series explores the origins, history, and record of U.S. airline deregulation with academics, officials, political figures, and industry leaders who played a significant role in this extraordinary public policy experiment. The series's earlier installements, with former Civil Aeronautics Board Chairman Alfred Kahn and Professor Michael Levine, are available online here and here.
Flying the Union Skies
The Wall Street Journal has an excellent op-ed piece on the AFL-CIO attempting to strong-arm the Obama Administration into twisting the terms of the Railway Labor Act to ease unionization of Delta Air Lines, JetBlue, Continental, and FedEx. See Flying the Union Skies, Wall St. J., Oct. 7, 2009 (available here). From the piece:
No trucks from Mexico, no new trade agreements, a sweet deal for the United Auto Workers at GM and Chrysler, tariffs on Chinese tires, and now Big Labor has another demand of the Obama Administration: Overturn 75 years of labor policy to sandbag Delta Airlines and unionize transportation workers. Will it get that too?
The latest looming political favor features the National Mediation Board, the federal agency established in 1934 under the Railway Labor Act to oversee labor relations in the air and rail industries. A department of the AFL-CIO last month sent a letter demanding that the board tear up longstanding rules requiring that a majority of all airline or rail workers vote in favor of union representation to win.
U.S./EC Second Stage Talks Resume
The United States and the European Community resume their aviation negotiations today as part of the ongoing process for a "second stage" agreement to their landmark 2007 bilateral. See Josh Mitchell, U.S., EU to Resume Open-Skies Talks, Wall St. J., Oct. 6, 2009 (available here); See also 2007 U.S./EC Air Transport Agreement, art. 21, 2007 O.J. (L 134) 4 (outlining the agenda and timetable for the second stage).
According to the news report, priority topics for this round of negotiations include night flight restrictions at EU airports which adversely affect the business operations of cargo carriers like FedEx and UPS and loosening U.S. foreign ownership and control rules for airlines. As the story rightly notes, easing either restriction would require a change in U.S. and EC law. While the article mentions the 2009 FAA Reauthorization Act's provision which would sunset antitrust immunity for international alliances, there's no direct indication that the alliance system is up for discussion.
There's probably very little hope that the current U.S. political climate will allow the seeds of authentic airline liberalization to germinate. With protectionist Democrats holding power in Congress and answering to the call of labor, current U.S. foreign ownership and cabotage restrictions are likely to remain. Thus, there will be little incentive then for the EC to concede to any U.S. demands. Time is running out for advancements to be made, however. Under the timetable established by the first agreement, both sides will soon begin reviewing their progress. See 2007 U.S./EC Air Transport Agreement, supra, art. 21(2)-(3). If no agreement is reached by November 2010, both sides may give notice that they are suspending some or all of the rights granted under the 2007 Agreement. Id. Any suspension of rights would take effect at the start of the March 2012 IATA traffic season.
October 6, 2009
oneworld's Preemptive Strike
With the Department of Justice actively interjecting itself into airline alliance antitrust immunity proceedings before the Department of Transportation, the oneworld Alliance filed an advance rebuttal to the issues raise in the Justice Department's late filing to the Continental/Star Alliance docket. See Dkt. No. OST-2008-0252, Joint Applicants' Motion to Leave to File and Supplemental Comments (Sept. 8, 2009) (available here).
While oneworld's rebuttal is only 25-pages long, the filing contains over 100 pages of additional supporting studies on the development and benefits of airline alliances and the competitive parity which would be created by a grant of antitrust immunity for the alliance.
There is no word yet on when or if the DOJ will file a direct response to oneworld during the proceedings.
From the Archives
While web-logs have many virtues, they also have more than a few faults. One which is particularly vexing for blog authors is that after a relatively short period of time, their posts fade into the obscurity of the "Archives," only to be uncovered by an enterprising few who feel inclined to comb the digital recesses or, perhaps, stumble upon them by way of a choice Google or Bing search. Since are alliances are back in the news, blog readers may enjoy reading some of these earlier posts.
October 5, 2009
NYT on Alliances
Blog readers may be interested in Micheline Maynard's Airlines Seek Global Allies to Expand, N.Y. Times, Oct. 5, 2009 (available here). As the story starts:
The sharp falloff in passenger traffic in the months after the 2001 terrorist attacks forced many airlines to file for bankruptcy or cut deeply into operations. When oil prices soared in recent years, carriers piled on new fees for baggage and fuel, and shut down unprofitable flights.
Now airlines are thinking of ways to grow again—this time, by teaming up with global partners to expand their international reach.
All of this is true, but it passes over in silence that the alliance system, starting with Northwest/KLM, has been around since 1993 and international codesharing--one of the key components of alliances--has been around since at least the 1980s. See 59 Fed. Reg. 40,836; see also U.S. General Accountability Office, International Aviation: Airline Alliances Produce Benefits, But Effect on Competition is Uncertain, GAO/RCED-95-999 (Apr. 1995).
The story also fails to mention the perseverance of the nationality rule in international aviation which prohibits conventional corporate mergers and acquisitions among airlines of different States. Instead, the piece pays notice to the now-popular view that "alliances are 'superior to mergers, because you don't have to go through the costs and upheaval of a merger.'" What's not mentioned is that unlike a merger, alliances don't allow airlines to fully rationalize their costs and operations. Also key is the fact they are unstable entities. In the last year SkyTeam has lost Continental Airlines to the Star Alliance and, up until a recent suspension of negotiations, the oneworld Alliance was actively trying to keep its Japanese partner JAL from defecting to SkyTeam.
Exacerbating the instability of the alliance system is the fact regulators on both sides of the Atlantic appear uncertain about how far they are willing to let the system grow. Late last week the European Commission notified oneworld that it may be in violation of European Community competition law. Similarly, the U.S. Department of Transportation has continued to drag its feet on granting oneworld the same approval and antitrust immunity that it has already bestowed upon Star and SkyTeam. Add into that mix the antitrust immunity sunset provision contained in the (currently stalled) 2009 FAA Reauthorization Act and the Justice Department's renewed interest in limiting the scope of immunity for alliances and what you have are longterm, complex business ventures whose existences hang on regulatory and legislative fiat. In other words, alliances remain--for better or worse--second best options in the face of outmoded and arcane crossborder merger restrictions.
JAL Suspends Talks with U.S. Carriers
A new story out this morning is reporting that Japanese Airlines is putting its negotiations with American Airlines and Delta on hold while a Japanese Government-appointed task force reviews the financial status of the airline. See Doug Cameron, JAL Task Force Puts Alliance Review On Hold, Dow Jones Newswire, Oct. 5, 2009 (available here).
For the moment, this has to be seen as good news for American Airlines. Unlike Delta, which acquired additional traffic rights into Japan when it merged last year with Northwest, American has limited access to the Japanese air transport market. (See correction to news reports to the contrary here.) To bolster its access, American relies on a codeshare arrangement with JAL as part of the Japanese airline's membership in the oneworld Alliance. For the past several weeks, analysts had speculated that Delta was looking to entice JAL to switch over to its alliance, SkyTeam, as part of an equity injection deal. At the same time, American had reportedly been offering its own equity investment and may have called upon some of its oneworld partners to join-in on the arrangement.
From the standpoint of aviation law and policy, hopes were high that any involvement from a U.S. airline in JAL would lead to Japan finally solidifying an open skies agreement with the U.S. Along with Brazil, China, and Russia, Japan is one of the major markets which does not have a liberal bilateral arrangement with the U.S. Under the terms of its current agreement, only Northwest and United Airlines have direct market access. United also benefits from its own codeshare agreement with Japan's other major airline, All Nippon Airways, as part of the Star Alliance. Due to unofficial U.S. international aviation policy restrictions which conditions antitrust immunity on the existence of an open skies treaty, neither Japanese airline enjoys the full level of integration Star and SkyTeam's transatlantic partners do.
October 4, 2009
A Study on Brand-Switching Behaviour
Blog readers may be interested in Mihir Dash's A Study on Brand-Switching Behaviour in High-End Airline Flight Services (Alliance Business School Working Paper, Sept. 14, 2009) (available from SSRN here). From the abstract:
Even though there are several companies that provide high-end airline flight services, two service providers, namely Kingfisher Airlines and Jet Airways, control the student segment in Karnataka. In order to attract customers, both companies offer several special promotional schemes, month to month. Some of these promotional schemes are: ‘free ticket,’ ‘cash-back,’ and ‘Fly-500.’ Notwithstanding these promotional strategies, a high level of brand-switching behaviour prevails in the high-end airline flight services segment.
The study analyses the effect of each combination of promotional strategies adopted by the two companies using the Markov brand-switching model. The optimal mixes of promotional strategies for the two companies are then found using game-theoretic techniques. Finally, as the analysis above is based on sample data, sensitivity analysis is performed to assess the effect of sampling/estimation error on the results.
oneworld Woes Continue
On Friday, the European Commission confirmed that it had sent a statement of objections to oneworld Alliance members American Airlines, British Airways, and Iberia concerning their plans to cooperate on scheduling, pricing, and capacity. See Press Release, Europa, Antitrust: Commission Confirms Sending Statement of Objections to Three Members of oneworld Airline Alliance, MEMO/09/430 (Oct. 2, 2009) (available here).
This has to be seen as a serious blow to the alliance, particularly given the uncertainty surrounding its pending antitrust immunity application before the Department of Transportation. Unlike in the U.S., alliances do not have the option of seeking the boon of antitrust immunity in the European Union. While the Commission has taken a generally positive view of airline alliances in the past, the tide may be turning as analysts and rival carriers have opined that deeper oneworld integration will restrict competitive access to London Heathrow. Though oneworld's competitors, Star and SkyTeam, already enjoy antitrust immunity, both remain under investigation by the Commission for possible antitrust violations.